Hello folks, On CFAI Book #2, page#106, Example 5 How come adjusting benefit paid to retirees and contribution by employer, unamortized pension cost ? what is the logic behind this Your help will be greatly appericiated. -Regards
hey there- i’m just starting back up on pensions today and this had to be one of the least fun sections of the material, hands down. on this question of yours- the “net periodic benefit cost” (or pension expense) as you can see on pg 107 is not reality. it uses an EXPECTED return on plan assets, not the real return. Also, it uses an amortization of net actuarial gains/losses, which smooths out the numbers over a period of years. on page 108 they calculate the economic pension expense, which eliminates the smoothing items and includes the ACTUAL (not expected) return on assets. the logic then is to compare the reality of the situation to a more smoothed out number. if you use the economic pension expense, it’s going to create more volatility. but as seen in this example, the smoothed out number is only a 748 expense where as the actual expense is 1120… this is a pretty big difference due to those smoothing numbers.